Our Strategy

The Fund's strategy is to combine under-explored possibilities in fund solutions.

Under-explored Possibilities

Traditional use - hedge funds as an alternative to bonds

Typically, a combination of hedge funds is used in pension fund portfolios to reduce risk in the same way that bonds are used in a traditional portfolio. Historically, a fund of hedge funds generated superior risk-adjusted returns relative to bonds.

The under explored possibility – hedge funds as an alternative to equities

Some investors with a higher tolerance for risk are reluctant to invest in hedge funds as many of these funds do not perform as well as equities in an up market - the reason for this is that upside is sacrificed in hedge funds in favour of consistent, positive returns.

These investors then remain invested in equities rather than considering investing in a hedge fund. However, this decision may be to their detriment as their investment portfolios cannot gain from any decline in the share prices of equities.

In contrast, if the investor's portfolio included some investment in hedge funds that did not significantly underperform in relation to equities, the portfolio could also have profited from falling share prices.

The innovative solution: RCIS THINK Growth QI Hedge Fund versus equities

By foregoing the need for absolute returns all of the time, strategically adjusting specific mandates and combining these for a particular outcome, investors currently invested in equities can be accommodated in hedge funds without changing their long term risk profile. The Fund allows these investors to benefit from the wider set of investment opportunities with a diversifying effect relative to equities to enhance longer term returns.

Strategy Pillars

The Fund's strategy is founded on three pillars, namely :

  1. Innovation;
  2. Synergy; and
  3. Balance.

1. Innovation

Innovation is defined as

  • a new idea, or more effective device or process; and
  • the application of better solutions that meet new requirements, unarticulated needs, or existing market needs.

By investing in hedge funds through various market conditions, certain trends were identified and tested - it was found that :

  • some fund managers exhibited a core skill which resulted in fairly consistent success; and
  • most managers possessed a different core skill.

2. Synergy

Synergy is defined as:

  • the potential ability of individual organizations or groups to be more successful or productive as a result of a merger; or
  • the creation of a whole that is greater than the simple sum of its parts. (Greek word "synergos" means "working together“).

The abovementioned trends presented a unique opportunity to combine the under-explored possibilities in a fund solution. THINK.CAPITAL thus designed a fund of hedge funds by:

  • identifying the most desirable skill sets and investment strategies;
  • optimising each of the respective skill sets (where necessary, bespoke mandates have been designed for the respective fund managers); and
  • deciding on the optimal combination of these skill sets and diverse strategies;

By combining the capital protection and return characteristics of hedge funds (relative to the FTSE/JSE All Share TR) investment synergy has been created with the objective to outperform equities over time. To achieve this balanced outcome, risk has to be closely managed.

3. Balance

Balance is defined as:

  • an even distribution of weight enabling someone or something to remain upright and steady; or
  • a situation in which different elements are equal or in the correct proportions.

As mentioned above, risk management is key to balance the capital protection and return characteristics of hedge funds.

Thus, the Fund solution focuses on both these characteristics relative to the FTSE / JSE All Share TR with the aim to outperform equities over time. The Fund solution balances two sides of risk namely:

  • diversification – it invests in a number of carefully selected mandates with experienced and independent hedge fund managers; and
  • concentration – it guards against the risk of over diversification.

The Fund's total risk exposure is managed with an aim to take advantage of opportunities in times of market distress, but not in itself create distress. This is achieved through :

  • a deep understanding of the risk exposure of each underlying mandate;
  • diversification across different mandates; and
  • an appreciation of the relationship of the exposures across these mandates.

Although we still take risk and the returns vary on a monthly basis, we aim to balance the risk taking in such a way that the Fund has the highest probability of successful returns. 

Currently, the Fund's underlying hedge fund mandates are comprised of:

  1. four equity mandates - each mandate  focuses on a different area of skill to:
    • stabilise,
    • invest long and short, and
    • trade; and
  2. two diversifiers (fixed income and soft commodity mandates).

Summary

Unlike the typical fund of funds' approach, this approach does not seek to generate absolute returns all of the time - rather, it allows for some contained downside some of the time to ultimately capture more upside.

However, the Fund maintains a strong focus on delivering:

  1. more positive than negative months; and
  2. on aggregate smaller monthly losses than gains.

This results in effective compounding and superior longer term returns. Compounding occurs when gains are generated on the back of gains. Effective gains are those that result in capital growth. Ineffective gains are characteristic of the inescapable law of investment that for every loss incurred, a higher return is needed from an investment to recover to its initial capital value. As losses increase, the gains needed for the capital to recover increases exponentially.

Ultimately this strategy should result in an outperformance of equities.





Physical Address:
Unit F12, Willowbridge Centre
39 Carl Cronjé Drive
Tyger Valley
Cape Town, South Africa

Images copyright © 2016 Think.Capital. All rights reserved.

General
info@thinkcapital.co.za

Elmien Wagenaar
elmien@thinkcapital.co.za
+ 27 (0)83 236 4099